Lessons of the Greek Euro crisis

The tragedy which Greece is living through will at least have taught us two things: the link existing at present between the Euro and austerity and the attachment of one part of the Left to the Euro, now driving the Left ever more rapidly to its doom. The first item makes us understand why the authorities of the Eurozone showed themselves to be so inflexible. The second item explains why Alexis Tsipras let his head be put on the block and did not choose a break-up when he still could have, namely, during the night of July 6th to 7th, after the victory of the « No » in the referendum.

The Euro means austerity

The Euro is linked with austerity through the very logic of the single currency, which puts into competition countries whose endowments in the way of factors of production (be they material or human, like the level of education) are very different. In order to re-establish their competitiveness against better endowed countries, the less endowed countries must pull off a higher savings rate (in percentage) than that of the better endowed countries. This leads to a displacement of consumption towards savings. As, in a single currency, any difference in the inflation rate translates immediately into a loss of competitiveness, the less-well endowed countries cannot count upon inflation as an instrument for financing their savings. One can then fathom the profoundly austeritarian nature of the Euro.

Which is reinforced by the fact that the inflation rate in a country does not depend on its monetary policy but is determined also by the structure of its economy. A country with a dynamic population will naturally have a rate of inflation that is higher than the one of a country with a stagnating or decreasing population. Similarly, the rate of inflation has an important impact on the creation of businesses: these creations, and the innovations which they can bring about, generate movements in relative prices (the price of a good or service as expressed in other goods or services) which imply a certain rate of inflation. As a result, to impose a unified inflation rate onto economies with very different structures implies that for some countries, growth will be largely inferior to what it could be. This is called in economic literature the problem of the output gap.

Finally, politically, the Euro introduces a very strong bias in favor of policies said « of austerity, » because it leads to substituting governments where decision making is king, by governments determined by accounting rules. These rules can be internalized by the political personnel, which is more and more the case in France, or they can be imposed by force, as is happening today in Greece.

So that there can be austerity without the Euro, but the Euro necessarily implies austerity. This is now evident for a large majority of Europeans, which are going to be more and more disgusted with the single currency. An article published in the Financial Times on July 13th stressed this aspect[1].

The reasons for an irrational attachment of the « Left »

But, having made this assessment, one finds oneself confronted with the positions of one part of the « left » which continues to defend the Euro in face of all opposition. We saw this in France where the “S” Party, including the supposed « frondeurs » (trouble-makers), supported the diktat of July 13th, and where even the French Communist Party, through the words of Pierre Laurent, almost gave it its support, before changing its mind and finally voting « no » in Parliament. One must recognize that there appears to exist an attachment to the Euro which seems to be irrational and which has transformed one part of the “Left” into the secular arm of the application of austerity[2]. Ambrose Evans-Pritchard, who describes himself as a « liberal in the tradition of Burke » goes as far as to write : « By a twist of fate, the Left has let itself become the enforcer of an economic structure that has led to levels of unemployment once unthinkable for a post-war social democratic government with its own currency and sovereign instruments ».[3]. The resignation letter from the SPD of Yascha Mounk, a German university professor, published in The Nation, well describes this movement which is particularly powerful in Germany, and the unease which it is generating. [4].

This “clinging to” also concerns one part of what is called the “radical Left”. It is this attachment which lead Alexis Tsipras to put his head on the block. The politologist Stathis Kouvelakis has attempted to analyse the phenomenon[5]. Without wanting to start a debate, it is possible to make out several reasons in this irrational and unhealthy clinging to the Euro.

The most benign reason is an under-estimation of the role of a currency in a modern capitalist economy. If a currency cannot exist without other institutions, and to this extent it is clearly not the only institution in an economy, the manner with which it is managed exerts a considerable influence onto the other institutions. This is simply called dialectics.

A wayward vision of « internationalism » pretending that in the name of common interests (which assuredly exist) the peoples would be mot manquant ?? This vision negates in reality the very notion of internationalism which specifies clearly that the “common” is common between the Nations but does not substitute for the Nations. This wayward vision maintains thus that the Free-Market is the present form of « internationalism ». One can then understand how it manages to institute the Euro as a fetish, without asking itself how come that « monetary unions » are rather rare in the world today. Any interrogation about this reality would compel the defenders of the Euro-fetish to come back down to Earth and to contemplate the wholesale costs and losses which it is bringing to bear on the economies of the zone.

A replacement ideology for the « Left » calling itself realist and designated as the « second Left.” The Euro has come to substitute itself to the perspective of a change of society which had been defended in France in 1981. Having abandoned all idea of social change, having even substituted the “societal” to the social, the so-called realist “Left” found for itself an ideology of replacement in the European construction, which it then rapidly identified with the Euro. Which is why it meets any challenging of the Euro as if one were putting into question said European construction, something which must be fought back with the most ferocious energy (and the greatest of bad faith) and against all evidence to the contrary. We have had an example of this type of behavior with the declarations made by the President of the Republic and by the Prime Minister of France since July 13th.

All these reasons will not exhaust the subject. One will point out, justifiably, that many of the economists who are advising the so-called “Government-Left,” are coming from the banks (or from insurance companies) and therefore have a direct interest in the preservation of the Euro. But reasons of the symbolic and political order are largely prevalent. As a consequence, the Euro question is going to be the big debate in the months to come. It is around this cleavage that we will see on one side a future Left come together, one intending to break with the logic of austerity policies and therefore of the Euro, and on the other those who will dig themselves in ever deeper into a logic of submission leading to the total acceptance of the logics of austerity.

[3] Ambrose Evans-Pritchard, « EMU brutality in Greece has destroyed the trust of Europe’s Left », op.cit., « By a twist of fate, the Left has let itself become the enforcer of an economic structure that has led to levels of unemployment once unthinkable for a post-war social democratic government with its own currency and sovereign instruments ».

This blog aims at the dissemination of some of my research works, including working papers, position papers or brief notes focusing either on the Russian economy (from macroeconomy to regional economics and finance) or on the European one, with a special attention to the Eurozone crisis.